Hollywood studios know the value of a big name. Having the words ‘Tom Cruise’ on the marquee still virtually guarantees a film will be profitable. Just like in the movie business, star power matters in the legal profession too.
The rise of private capital has changed the shape of law firms’ relationships with their most profitable clients. Once, banks and corporates were the clients who mattered the most. Their sprawling organisations necessitated equally-sprawling ‘many to many’ relationships with their law firms.
No one individual held the key to the relationship and as a result, they stuck with their law firms for generations. Today, private capital firms function very differently. Often, a private capital leader will have a one-to-one relationship with a key partner at a law firm. This is how the Tom Cruises of the legal profession are born.
The superstars who hold those critical relationships benefit from the (usually implied) threat that they could move and take their clients with them. That threat can make a $20m per year salary a very smart investment for a law firm, especially if that superstar brings three times that salary with them in billings.
That’s why, even for firms with no great history or pedigree in private capital work, taking a ‘big swing’ on hiring a PE superstar can be a risk worth taking. Of course, no leading private capital practice is the work of one single individual. What we’re really talking about is the movement of entire private capital teams from one firm to another.
Hiring a PE superstar and their team is not a guaranteed win for a firm, however. Two gradual changes have increased the risk of PE superstar hires in recent times.
First, I have consciously used the term ‘private capital’ here, because it more accurately represents what the largest sponsors are today. Private credit is now a bigger business than buyouts. Yes, lawyers can still command huge fees for their private equity work, but that work is now a minority of what the largest private capital groups do. The rates clients are willing to pay for private credit work are markedly lower, putting a cap on fees.
Second is the thorny issue of how PE superstar lawyers’ pay might be viewed by the private capital firms themselves. There can be a ceiling on how much a lawyer can be paid without it causing internal political difficulties for their clients. If a private capital manager ends up paying their lawyer more than their own dealmaking superstars, can the CEO sell that to their team? The answer in some cases may well be ‘no’.
Charge-out rates for private equity work have been rising inexorably for 20 years, but there is a growing view among private capital firms that the brakes must be applied. It is therefore not a given that a superstar lawyer will bring their biggest clients with them. Very expensive mistakes have been made. The Lateral Partner Questionnaire (LPQ) – the form that every partner fills out when being recruited by a new firm – should help to identify this risk. However, as I was once told by a City law firm managing partner, ‘the LPQ must be as accurate as possible, but it’s not an affidavit.’ You can never quantify a relationship precisely on a sheet of paper.
For firms unwilling to take the financial risk of hiring a superstar, how easy is it to identify lawyers who might become future superstars?
Impeccable technical skills and understanding of deal mechanisms are only the bare minimum. Every private capital lawyer with any track record will have these. What sets a PE superstar lawyer apart from their peers is an incredible commitment to client service and communication. Lawyers who invest in their client relationships to a truly ‘above and beyond’ level are those who reach superstar status. A lawyer who identifies issues far ahead of time and fixes them before the client is ever aware of their existence is one who magnifies upside and reduces downside for a private capital manager. That level of service justifies the fees charged.
The most successful PE lawyers are those who see their clients outside the office, and those who – and this has happened in real life – act as best man at their clients’ weddings. When being a great lawyer is no differentiator, the game is simply about wanting it more. Those who demonstrate the greatest desire to serve the client win.
For law firms, having a major private capital offering is still the jewel in the revenue crown. Firms that missed the first wave of private equity work in the 80s and 90s have struggled to catch up ever since, such are the effects on the bottom line of being a leader in private capital. As long as that remains the case, firms will be willing to spend outsize sums on superstars.
